Dave Ramsey has helped thousands of people around the world through the 7 Baby Steps for financial peace and freedom.
The process works.
His book titled the Total Money Makeover has had some impressive sales numbers. The book has sold over 5 million copies and has been on the Wall Street Journal Best-Selling list for over 500 weeks. (That data is from August 2017, over 4 years ago, so it’s sold more by now.)
So, we know that the 7 Baby Steps work. There’s a lot to love above the process, and we will address 4 of those attributes here. We will also cover 4 things that we think could be updated this year (as it has been almost 30 years since the Baby Steps were created).
7 Baby Steps really do work. There are three great reasons why the plan actual works:
a. The Baby Steps Force You To Get Gazelle Intense When It Comes To Paying Off Debt
I’ll mention this later, but I really appreciate that Dave Ramsey keeps the emergency fund smaller to force you to be gazelle intense. Having such a small emergency fund of $1000 really does force you to get out of debt faster because having too much money in the bank can cause you to stagnate.
b. Dave Strongly Encourages Your Behavior Modification
Too many financial gurus don’t give it to you straight. They may tell you that you need to invest in real estate or cryptocurrency. It often feels like a lie that you can achieve financial freedom without putting in a lot of work.
Dave Ramsey comes off as blunt many times, but he forces people to confront that the debt is often our fault (with some exceptions). His bluntness, along with the Baby Steps, forces you to self-reflect.
c. The Plan Is Simple And Shows How You Need To Focus On One Step At A Time
I’ll mention this more below, but it’s evident that his focused intensity on the Baby Steps plan helps you stay focused on the task. You complete the first 3 steps consecutively and the following 4 steps concurrently in a prioritized order.
You don’t have to multitask. Also, you don’t need to think about another step. You just need to focus on the step at hand.
2) Dave Ramsey Is Right That You Need A Plan
Dave Ramsey has many helpful quotes. One of my favorite of Dave Ramsey’s quotes is, “You must plan your work and then work your plan”.
Too often we go through life without a plan, but we expect that everything is going to work out just fine. I remember the first time I budgeted. I thought that I spent a certain amount of money on eating out each month, only to realize that number was much higher.
We need plans. It could be a debt payoff plan to stay on top of your debt. It could also be a budget to understand your income and expenses. Or it could be a plan to pay off your home early as per Baby Step 6.
Dave Ramsey understood that which is why the Baby Steps plan is so useful. You stick to the plan and you get out of debt. Voila.
3) The Baby Steps Get Progressively More Challenging
One thing I noticed early was that the Baby Steps seems to get progressively more challenging. This helps build momentum. It is much easier to save $1000 than to pay off your house early. By starting and taking baby steps, the baby steps themselves actually don’t feel very babyish.
Paying off your home early per Baby Step 6 feels much more like a big kid step, but it’s still just a Baby Step like the others. It’s impressive how Dave structured these baby steps.
4) The Community Around Dave Ramsey Baby Steps Is Incredible
You don’t have to look far to realize that the community around Dave Ramsey is incredible. You can take a Financial Peace University class at your local church. These classes are excellent to encourage you and help keep you accountable while you eliminate debt. You’ll learn the baby steps inside and out with others in your community.
You can also be a part of a vibrant Dave Ramsey Facebook Community. Personally, I am a part of many of these communities where I receive a ton of encouragement when sharing wins and losses in the process of debt elimination.
There’s a lot to love about the Dave Ramsey Baby Step method.
Now, let’s cover a few things that could use a refresh.
1) Can Creating A Budget Be Baby Step #1?
I am a budget fanatic. I would love to see a Baby Step dedicated to budgeting. Why? Because budgeting helps you understand where every dollar goes. I used “every dollar” like that on purpose because Dave Ramsey himself created a budget app called EveryDollar for that very purpose.
What better way to understand how much money you have to put towards your emergency fund than starting with a budget.
I am not sure why Dave doesn’t start with a budget, but I would be keen to start the Baby Steps with creating one.
2) Dave Ramsey’s Emergency Fund May Need A Refresh
Dave Ramsey’s emergency fund calls you to save $1,000 in Baby Step 1. Is $1,000 enough? It really depends.
First, adjusted for inflation, $1,000 in 1990 is now worth $2,043.26 per the US Inflation Calculator.
There’s a plethora of questions you can ask yourself when considering whether the emergency fund is big enough, such as:
- How much debt do you have to pay off?
- Do you own a home?
- How old is your car?
- How many kids do you have?
- Do you have insurance?
Another question I like to ask is, “where do you live?”. Personally, my family and I live in the Bay Area, California where the cost of living tends to be quite high. $1,000 wouldn’t get us very far.
3) Is The Snowball Method The Best Way To Pay Off Debt?
As a refresh, the debt snowball method means that you line up your debts from smallest to largest and pay your monthly extra to your smallest debt first then snowball into higher debts. The debt avalanche method is where you line up your debts from the highest interest rate and use your monthly extra to pay off the highest interest first. The savvy debt method is where you pay off 1-2 of your smallest balances first via snowball before reverting to the avalanche method to save the most in interest.
Dave Ramsey loves the debt snowball method. It has worked for many people, so why wouldn’t he? He feels the opposite for the debt avalanche where he mentions that it doesn’t work.
The challenge is that you could lose thousands in interest if your smallest debts also have the smallest interest rates. This can be possible because higher debt amounts carry a higher risk to the lenders, meaning potentially higher interest rates.
You can see how much the snowball method loses in comparison through this debt payoff calculator which compares interest paid from snowball to savvy methods. For reference, we are comparing 4 debts: $23,000 at 22%, $18,000 at 19%, $12,000 at 9% and $8,000 at 7% interest rate. The monthly payment is $1,825.00
In this example, you would lose over $3,500 in interest by choosing the snowball method.
Does that mean that the snowball method is always worse? Absolutely not. The snowball method may provide the psychological benefit that you need to exterminate your debt.
You choose the debt payoff app and debt payoff method that is best for you.
4) Should You Follow Dave Ramsey’s Advice And Pay Off Your House Early Or Invest?
Dave Ramsey loves mutual funds and paying off your home early. My question is what if your mutual funds are making so much more in interest than paying off your home would save you?
Wouldn’t the prudent thing be to continue to pay off your home and then get the higher interest from investing in mutual funds? It’s not a one size fits all solution, but it is something to consider.
There are also often benefits of not paying off your home early such as interest paid being tax-deductible. That said, you would really need to determine whether you would make more money from mutual funds than saving from interest payments to determine what’s best for you.
What Do You Think About The Baby Steps?
The Dave Ramsey Baby Steps have helped thousands around the globe. What do you like about the Baby Steps? Do you agree or disagree with what we would change in 2021?
Whether it’s from job loss due to a recession, a drop in income, or an unexpected major expense, there may come a time when you struggle to pay your bills. What can you do when your income and expenses don’t match up?
It’s essential you prioritize your bill payments and what you owe, paying the most important bills first.
Bills to Prioritize When You’re Low on Money
The most important bills are those that cover the necessities: shelter, food, water, and heat, for example.
The next most important are bills that cover things that make it possible for you to get where you need to go, such as your vehicle expenses.
Last on the list are bills that can ding your credit history, but not much else, if you fall behind on them.
Although you can make some adjustments to the order you pay bills based on your circumstances, it’s usually best to focus on paying your housing bills first, then paying what you can with the money you have remaining.
1. Mortgage or Rent
If you fall behind on mortgage payments, you risk having the lender foreclose on your home. If you fall behind on rent, your landlord can evict you.
Even though the foreclosure or eviction process can take months, it’s not something you want to risk happening. Keeping up with your housing payments is a must if you want to stay in your home.
When money is really tight and you’re not sure you can pull together enough to make a payment one month, the best thing to do is talk to your landlord or lender.
Many mortgage lenders have programs in place to help homeowners who are facing financial hardship. Your lender can review your options, such as forbearance or loan modification, with you.
During forbearance, you stop making payments on your loan, but interest continues to accrue. If a lender agrees to modify your loan, they adjust your interest rate or otherwise make changes to lower your monthly payment.
The United States Department of Housing and Urban Development (HUD) also has programs available to homeowners struggling with their mortgage payments. You can contact HUD to connect with an approved counseling agency. The counselor can work with you to create a plan to help you avoid foreclosure.
If you’re a renter, talk to your landlord as soon as you know you’ll have difficulty paying rent. Explain the situation to them in detail, including whether you think you’ll be late with payment, won’t be able to pay all your monthly rent, or won’t be able to pay at all.
Many landlords are willing to work with you to come up with a solution. You can help the situation by suggesting solutions.
For example, if you’re going to pay late, tell the landlord when you plan to make the payment. If you can’t pay the full amount this month, tell the landlord how you’ll make up the difference. For example, you can add an extra $100 or so to subsequent payments until you pay off the balance.
If you’re renting and your landlord can’t or won’t be flexible about payments, you might have more wiggle room than a homeowner.
Depending on how much time you have left on the lease, you can simply wait it out, then look for a less expensive place to live. Another option is to try to find someone to take over your lease so you can move somewhere that costs less.
After your mortgage or rent payment, the next most important bills are your utility bills: gas, water and sewage, and electricity. Although some people count TV and the Internet as utilities, those services aren’t essential for everyone.
Fortunately, many programs exist to help people who need emergency financial assistance paying bills. The first place to look is your local utility provider. Many utility companies have programs to help people pay their bills.
Another option is the Low Income Home Energy Assistance Program (LIHEAP), a federally funded program that provides financial assistance to help people pay energy bills. LIHEAP has specific income requirements and is grant-funded, meaning only a set amount of money is available each year.
If you think you qualify for LIHEAP, the sooner you apply for it, the better your chances of receiving aid.
3. Insurance Premiums
Having insurance is always a good idea, as it provides financial protection against the worst things life can throw your way, such as illness, fire, or accidents. Paying your insurance premiums even when money is tight is a smart move. Without insurance, medical bills can easily add up.
If you’re struggling to afford your premiums, you do have some options, particularly when it comes to health insurance.
If you purchased a plan from the Healthcare.gov marketplace, you qualify for a special enrollment period if you’ve recently lost your job and associated coverage, if you’ve had a change in income, if you’ve gotten divorced, and for a few other reasons.
During the special enrollment period, you can apply for Medicaid or CHIP if your income is below the threshold or a credit on your insurance premiums based on your income. Doing so can lower the cost of your health insurance considerably.
4. Food & Household Necessities
Food, soap, and paper products are up there with shelter, heat, and hot water on the list of essentials.
Luckily, you have more wiggle room when it comes to adapting your food and household supply costs compared to your mortgage or rent payments and utility bills.
When money’s tight, there are many ways you can trim your food and supplies bill:
- Limit Shopping Trips. Plan your meals for the week, make a list of the ingredients you need, and go to the store once. The more you go to the store, the more likely you are to buy things you don’t need.
- Buy Store-Brand Items. Store-brand products usually taste the same as or similar to their brand-name counterparts, but they cost a lot less. If you typically purchase branded foods and supplies, try switching to the store brand. It’s likely the only place you’ll notice a difference is in your wallet.
- Limit Packaged Products. Packaged foods, such as grated cheese, bagged salads, and prechopped vegetables are convenient, but that convenience comes at a cost. You can save a lot if you buy whole, unprocessed foods and prepare them at home.
- Skip Bottled Water. If you live in the U.S., it’s highly likely your tap water is safe to drink. According to the CDC, the U.S.’s water supply is among the safest in the world. Bottled water is expensive and terrible for the environment and is often little more than repackaged municipal water.
- Buy In-Season Produce. Pay attention to seasons when shopping for fresh produce. Fruits like strawberries and blueberries are usually in season and inexpensive during the summer but cost more in the winter. You can cut your grocery costs if you buy what’s in season.
- Grow Your Own. Another way to cut your food bill is to grow your own fruits and vegetables. Herbs and green vegetables are usually the most cost-effective edible plants to grow, as you can get an entire plant for the price of a handful of herbs or greens at the grocery store. You don’t need a ton of outdoor space to start a garden. You can grow plants in containers on a small balcony or patio.
- Use Your Freezer. Frozen vegetables and fruit often cost less than fresh, so it pays to purchase those when money is tight. You can also prep double batches of meals to freeze for later. That way, if you run out of money before the end of the month, you have a supply of ready-to-eat meals waiting for you.
Note too that depending on your income, you can qualify for financial assistance with groceries. The Supplemental Nutrition Assistance Program, aka food stamps, helps to cover the cost of groceries for people with income below certain thresholds.
Pro tip: Make sure you’re saving as much money as possible on your grocery trip. Apps like Fetch Rewards and Ibotta allow you to save money on purchases by simply scanning and uploading your receipts.
5. Car Loan & Other Expenses
Your car gets you to and from work and other important places, such as your kids’ school, the grocery store, and the doctor. If you have a monthly car payment, it’s crucial to find a way to pay it.
Just as you can call your mortgage company to work out a deal, you can call the lender behind your car loan to see if you can come to an agreement. Like mortgage companies, these lenders can also offer you loan modifications, refinancing, or forbearance.
Loan modification or refinance can lower the amount of your monthly payments, making it easier for you to afford the car. Forbearance means you don’t make payments for a set period.
Another option is to sell your current vehicle, use the proceeds to pay off the loan, then purchase a less expensive model. If you decide to sell, look for a replacement car that has a low cost of ownership to keep your expenses low. Some vehicles are more reliable than others, meaning you don’t have to worry about expensive repair or maintenance bills.
6. Unsecured Debts
Although you should make every effort to repay your debts, when money is tight, unsecured debt, such as credit card debt and personal loans, should move to the back burner. While these debts typically have the highest interest rates, they also have the lowest impact on your daily life.
You don’t go hungry if you miss a credit card payment, nor can your credit card company take your home or car if you pay late.
That said, it’s still best to pay what you can toward unsecured debts, such as the minimum due on a credit card. If even that is too much for you right now, contact the card company or lender. Sometimes, credit card companies are willing to work with you to create a debt repayment plan or let you temporarily pause payments.
7. Student Loans
While you should make every effort to pay your student loans when money’s tight, the loans often have the most flexibility when it comes to repayment, particularly federal loans.
If you have federal student loans and you’re struggling to keep up with payments, you have multiple options. You can request a deferment or forbearance from your loan servicer, or you can switch to an income-driven repayment plan, which adjusts the amount you pay each month based on your income.
The situation with private student loans is a bit different, as they don’t have the same protections as the federal student loan program.
If you’re having trouble affording private student loan payments, your best option is to contact the lender to see if it offers forbearance, repayment plans, or loan modification.
What to Cancel When Money Is Tight
While some monthly bills are essential, others are considerably less so. Budgeting often involves deciding what you need to spend money on and what you can live without.
When it’s a struggle to make ends meet, here’s what you can consider cutting:
Netflix, print or digital newspapers, and meal kits are all things that can go. In many cases, you can find free alternatives to the subscriptions you were paying for. For example, some local libraries give you access to streaming movies and local or national newspapers for free.
Make sure you don’t miss any subscriptions that you might have forgotten about. Services like Truebill will find subscriptions and either cancel them or negotiate lower rates for you.
Cable and Internet Service
You may not want to disconnect your Internet completely, but see if you can switch to a slower, less expensive plan.
If you have data on your phone, some providers, like Xfinity Mobile, let you use your phone as a hotspot to get online. In this case, you wouldn’t need a separate home Internet plan.
While you do need your phone to stay connected, you most likely don’t need both a landline and a cellphone. You probably don’t need the most expensive cellphone plan, either.
Shop around with companies like Mint Mobile or Ting to see if you can get a better deal.
Gym Memberships and Wellness Services
Maintaining your well-being is important, especially when money is tight. But if you’re worried about having enough money to pay your most important bills, you shouldn’t have to worry about paying for a monthly gym membership or studio pass.
There are plenty of ways to work out for free from the comfort of your home. For example, you can find workouts available for free on YouTube.
When money is tight, it’s vital you focus on paying for the things that can help you sustain your life and well-being, such as food and shelter, when times are tight.
While a missed payment can affect your credit history, in desperate situations, your health and safety are more important than your credit score.
Along with prioritizing your monthly bills, talk to your lenders and service providers. Many companies have programs in place to keep you from sinking deeper into debt and to help you avoid repossession of your home or vehicle. Keep the lines of communication open, and remember you’ll get through it.
If you’re looking to increase your income and you’re ready to take action, the side hustles covered in this article could all be started this weekend.
Some side hustles allow you to start making money immediately and others involve building a business with excellent long-term income potential.
Regardless of your situation, you’re sure to find something that’s a good fit for you.
make an extra $500 per month, and that’s realistic with a blog.
The downside to blogging is that you’ll need some patience. Growing a blog from scratch takes time, and most bloggers make very little money in the first 6-12 months. However, once you’ve gained some momentum, it’s a great way to make money online.
Why You Might Want to Start a Blog:
- Unlimited income potential.
- Flexibility to work around your existing schedule.
- You can start a blog on the topic of your choice.
- Potential to make money on your own without the need for client services.
- Easy and inexpensive to start.
How to Get Started
The first step is to decide what you’re going to blog about. While you don’t need to be passionate about the topic of your blog, it helps if you at least have some interest in the subject. Working on the blog will be a lot more fun if it’s something you enjoy.
Next, you’ll need to sign up for a web hosting account to get your blog set up. I recommend Bluehost for new bloggers because their prices are among the lowest in the industry, and it’s straightforward to get set up. The article How to Make Money Blogging as a Side Hustle is a great guide you can follow.
2. Start a YouTube Channel
Starting a YouTube channel is another enticing option that offers many of the same benefits as blogging. It’s a flexible opportunity that offers significant income potential. The difference is, you’ll be creating content in video format instead of written format. If you enjoy being on camera more than you enjoy writing, YouTube may be a better opportunity than blogging for you.
The highest-earning YouTubers are making tens of millions of dollars per year, and the numbers keep growing each year. As the amount of video content consumed by the average person continues to increase, the earning potential for YouTubers will also increase.
Like starting a blog, growing your YouTube channel will take time, and you aren’t likely to start making money right away. The most common way to monetize a YouTube channel is through the YouTube Partner Program, which allows you to make money from ads on your videos. You’ll need at least 1,000 subscribers and 4,000 watch hours to be eligible for the program. Those numbers may seem high, but many active YouTube channels can reach that level within a few months.
Why You Might Want to Start a YouTube Channel:
- Unlimited income potential.
- Surging demand for video content.
- Less competition than blogging.
- Can be a lot of fun.
How to Get Started
YouTube for Beginners is a course from Skillshare that was created by an experienced and successful YouTuber. It teaches everything you need to know to start and grow your channel.
3. Online Surveys
The first two options I’ve mentioned offer excellent long-term income potential but will take some time before you start making money. Taking online surveys is the exact opposite. You’re not going to get rich by taking surveys, but this is a highly flexible side hustle, and you can start making money immediately.
If you’re looking to make an extra $100 per month, or maybe a few hundred dollars per month, taking surveys could be a good option. There are several survey websites and money making apps you can use to start making money right away. Some of the best choices include:
Surveys are appealing because anyone can do this side hustle. You don’t need any particular skills or experience to make money in your spare time.
Why You Might Want to Take Online Surveys:
- Extreme flexibility: take surveys whenever you have a few minutes to spare.
- Anyone can do it. No specific skills or experience required.
- Start making money right away.
- Sites like Swagbucks offer lots of ways to make money in addition to surveys.
How to Get Started
Getting started is quick and easy. Create a free account at the top sites like Swagbucks and Survey Junkie, complete your profile, and begin taking surveys. Each site will have different rules regarding the amount of money or points you need to earn before withdrawing the cash or redeeming points. Swagbucks allows you to redeem points as soon as you have enough for a $3 gift card, making it one of the best options.
4. Flea Market Flipping
If you enjoy finding amazing deals at yard sales, flea markets, auctions, estate sales, or thrift stores, becoming a flipper could be the right choice for you. This side hustle involves buying underpriced items and reselling them for a profit.
Finding valuable items at places like yard sales and flea markets is pretty easy with a little effort. Many people are simply looking to get rid of their stuff, and you can find some great deals. Most flippers resell the items online through eBay, the Facebook Marketplace, Craigslist, or other similar sites and apps.
Flipping is a flexible side hustle you can do whenever you have the time or need to make some extra money. It’s also possible to start earning a profit very quickly.
Why You Might Want to Become a Flipper:
- Can be fun if you enjoy finding great deals.
- Good income potential.
- You can learn the skills quickly.
- Great fit for people who don’t want to spend all of their time online.
How to Get Started
To get started, all you need to do is head out to some yard sales or flea markets this weekend and look for underpriced items to buy. It’s best to start with products that you know well. With a little bit of experience, you’ll get more familiar and more comfortable with a broader range of products. See this list of the easiest things to flip for profit as a guide for getting started.
5. Furniture Flipping
Most of the items you buy at yard sales or flea markets to flip will involve minimal work to get them ready to sell. You might clean up an item or make minor repairs, but in most cases, you’ll be making money primarily by finding things that are worth more than they’re selling for.
Flipping furniture is different because it requires putting in several hours of work to restore the item before selling it. The idea is to find a low-priced (or free) piece of furniture that has the potential to be much more valuable if it is restored or refinished. Solid wood furniture is ideal because you can increase the value simply by painting or staining it. Upholstered furniture can be reupholstered for a completely new look, increasing the value relatively quickly.
If you enjoy working with your hands and turning something old and unwanted into something valuable, this could be the perfect opportunity for you. Learning how to repair or restore furniture is not that difficult, and there are plenty of YouTube videos that will teach you for free.
You can find items to flip at yard sales or drive around and look at pieces out for the trash. Once your item is ready to sell, the Facebook Marketplace and Craigslist are ideal for reaching people in your local area.
Why You Might Want to Flip Furniture:
- Work whenever you have time or whenever you need money.
- High demand for restored furniture.
- Anyone can learn the skills.
- Start making money quickly.
How to Get Started
To get started, you’ll need to find your first piece to flip. Take a look around your home or apartment, and you may already have an ideal item. Working on a piece of furniture you already own is a perfect way to start. It means that you won’t have to spend any money buying an item, and it gives you a chance to make a profit quickly. If you don’t have anything, head to some yard sales this weekend and see what you can find.
Over the past year, investing as a side hustle has become increasingly popular. Stories of part-time investors making huge sums of money have been in the news a lot. Of course, the stock market’s trajectory over the past year made that more manageable, but this is a side hustle you might want to consider if you enjoy personal finance and investing.
It’s critical to remember that investing comes with risk, and you shouldn’t invest money that you can’t afford to lose. However, there’s also a substantial upside if you have success with it.
Platforms and apps that are ideal for new traders include:
Of course, investing in the stock market isn’t the only option. You could also invest more passively in real estate or other types of alternative investments. Some platforms you might want to consider include:
You can also find plenty of alternative investment options here.
Why You Might Want to Start Investing:
- Excellent long-term potential.
- Opportunity for exponential growth.
- Valuable skills to learn.
How to Get Started
To get started, decide which type of investing you want to do. This beginner’s guide is a good resource for anyone who wants to get started with the stock market.
Are you a hobbyist photographer? Would you like to start making money from that hobby?
There are several different ways to make money with photography, but we’ll look at two great options for getting started as a side hustle: client photo sessions and stock photography.
No matter where you live, there are people in your local area looking for a photographer. You could take photos of families, engaged couples, high school seniors, sports teams, and much more.
Making some part-time money by offering photography services is relatively easy. Scaling it to a full-time income is much more challenging. If you’re looking for a way to make a few hundred dollars per month on the side and you have some photography skills, consider offering your services to others.
Another option is to upload your photos to stock photo websites like Adobe Stock, Shutterstock, and many others. You’ll be able to earn money every time a customer downloads one of your photos.
The stock photography market is highly competitive, so it’s not easy to make a considerable amount of money. But if you’re looking for a way to make a few hundred dollars per month, it’s very realistic. To have success, you’ll need to upload many photos and keep taking and uploading new pictures all the time.
Why You Might Want to Become a Photographer:
- Monetize your existing hobby.
- Variety of ways to make money.
- Potential to grow into a full-time business.
How to Get Started
Choose whether you want to offer services to clients or upload your photos to stock marketplaces (or both).
For client work, the best way to get started is with friends and family. Talk to everyone you know and offer a low price to begin to get some business. With a little bit of experience, you’ll get to build up your portfolio and benefit from word-of-mouth advertising.
To get started with stock photography, choose a platform you want to use. Ultimately, you’ll want to upload your photos to several different sites to maximize your income potential, but it can be helpful to start with just one, so it’s not overwhelming. Each stock photo site will have an application process to become a contributor. You’ll probably need to upload some samples, so get ten of your best photos ready to go.
You can offer many different services as a freelancer, including writing, editing, proofreading, web or graphic design, coding and development, marketing, and more.
Freelancing is a great way to make money because you can use the skills you already have to start making money quickly. You’ve probably developed some skills at a previous job (or maybe your current job), or even through a hobby.
The income potential with most freelance services is also outstanding, making it ideal for growing to a full-time income if that’s something you want to pursue.
Why You Might Want to Start Freelancing:
- Lots of possibilities and many services you could offer.
- Monetize the skills and experience you already have.
- Excellent income potential.
- Flexible working hours.
How to Get Started
My article How to Make Money Online for Beginners covers the steps to follow if you want to start as a freelancer.
9. Virtual Assistant
Working as a virtual assistant or VA is one of the best opportunities available in 2021. Many businesses are looking to outsource more work, and as a VA, there are numerous different services you could offer.
Many VAs do things like general administrative tasks, blog editing, moderate forums or Facebook groups, management of social media profiles, and much more.
Working as a VA is a very flexible side hustle that fits around your existing schedule. It’s something you could do part-time or work on growing your client base and turn it into a full-time business.
Why You Might Want to Become a VA:
- High demand for talented and reliable VAs.
- Work as much or as little as you want.
- Monetize your existing skills.
- Good income potential.
How to Get Started
Gina Horkey’s Fully-Booked VA is an excellent resource for anyone who wants to make money as a virtual assistant. There’s training for all aspects of running your business, and you’ll be able to learn from an experienced and successful VA.
10. Self-Published Author
If you like to write, you might want to consider becoming a self-published author as a way to make some extra money. With print-on-demand platforms like Amazon’s Kindle Direct Publishing (KDP), becoming an author has never been easier. There’s no need to send your writing to a bunch of publishers hoping to hear back.
Through KDP, you can sell e-books and paperbacks without the need to spend any money on inventory. The paperbacks are printed as they’re purchased, and Amazon handles all of those details.
You can write whatever type of book interests you, covering any topic or genre you choose. You probably already have some experience you could use to write a book that others would buy.
Why You Might Want to Become a Self-Published Author:
- Make money doing something you enjoy.
- Making money as an author has never been more realistic.
- Completely flexible. Work whenever you want.
- Potential for passive income.
How to Get Started
From First Draft to Bestseller is a detailed and thorough course that teaches how to make money as a self-published author.
11. Sell on Etsy
If you’re crafty, you might enjoy selling on Etsy. You could sell handmade or vintage items, or even design and sell digital products like printables.
Selling on Etsy is a side hustle that may take some time to become profitable because you’ll need to work on getting exposure and growing your shop. The long-term potential is solid, but you’ll probably need to put in a lot of work early on.
Why You Might Want to Start an Etsy Shop:
- Monetize your crafty hobby.
- Work around your existing schedule.
- Excellent income potential.
How to Get Started
The course Building an Etsy Shop That Sells is an excellent starting point. Beginners will learn all of the necessary details related to getting started on Etsy.
The opportunity to make money with microtasks is very similar to taking online surveys. You’re not going to make a lot of money per hour, but what it lacks in income potential, it makes up in terms of flexibility.
Several websites like Amazon’s Mechanical Turk and Clickworker pay people to do small, simple tasks that take no more than a few minutes. Some survey websites like Swagbucks also offer a variety of tasks you can do for money or rewards.
You can work on microtasks whenever you have some spare time, as much or as little as you want. And like surveys, anyone can do the work. You don’t need skills or experience, aside from fundamental computer skills.
Why You Might Want to Do Microtasks:
- Extreme flexibility. Work whenever you want, as much or as little as you want.
- Anyone can do it. No skills or experience needed.
- Start making money right away.
How to Get Started
To get started, create a profile at a microtasking site like MTurk or Clickworker. The signup process is easy, and you’ll be able to start completing tasks very quickly.
13. Rental Business
One of the more overlooked side hustles involves renting out your stuff. There are many different things you could rent, including:
- Baby gear
- Car, truck, or bike
- Storage space
- Room or unit in your home
- Parking space
With a rental business, you’ll be making money because of your assets, not because of the amount of time you’re working. If you have things that people are willing to pay to use, you might be able to make a decent amount of money on the side without working many hours.
Why You Might Want to Start a Rental Business:
- Turn things you’re not using into income-generating assets.
- Make money from your assets, not trading your time for money.
- Lots of different things you could rent out.
How to Get Started
Take a look at the things you already have. Try to find anything that might have value that you’d be willing to rent out. You can use a website like Fat Llama to list just about anything for rent or use a specialized platform like RVshare to rent out a specific type of item. Use Airbnb to rent a room or vacation home.
If you’re interested in making some extra money outside of a job, why not take action right away? This article covers 13 good side hustles you could start this weekend, and most of them involve minimal startup costs or no cost at all.
Pick one that seems like a good fit for you and commit to taking action this weekend!
As a new investor, venturing into the stock market can be a bit intimidating. You know that the idea is to buy stocks at a low price and sell them later for a higher price. But when it comes time to buy individual stocks, you may be at a loss.
How do you go about deciding which stocks to buy and when to buy them? There are several factors you should consider before pulling the trigger.
Factors to Consider When Buying Stocks
When you buy a stock, there are several factors that you should consider before pulling the trigger. After all, you want to buy shares in a great company, at a great price.
But what criteria qualifies a publicly traded company as a great company, and how do you know if the price you’re getting is a great price? How can you tell which stocks are a fit for your portfolio?
Here are the main factors you should consider before buying any stock.
1. Your Time Horizon
The time horizon associated with an investment will play a crucial role in whether it makes sense for your situation. Here’s how time horizons break down:
A short-term time horizon is any investment that you plan on owning for under one year. Investments with a short time horizon have little time for recovery if things go wrong.
If you’re planning on holding an investment for under a year, it’s best to invest in stable blue-chip stocks that pay dividends. The companies represented by these stocks are large corporations with rock-solid balance sheets, making the risk of loss minimal. On the other hand, gains through these investments tend to happen at a slow, steady pace.
A medium-term investment is an investment you intend to hold anywhere from one year and a day to 10 years.
Due to the longer time horizon, you have more time to recover should something go wrong. Although you shouldn’t dabble in penny stocks, even with a medium-term investment, the longer term opens the door to investing in quality emerging markets stocks and other stocks with a moderate level of risk.
Finally, long-term investments are any investment you plan on holding onto for more than 10 years. These investments have the most time to recover if something were to go wrong, giving you the ability to take the most risk in an attempt to generate a significant return.
Pro tip: David and Tom Gardener are two of the best stock pickers. Their Motley Fool Stock Advisor recommendations have increased 563% compared to just 131.1% for the S&P 500. If you would have invested in Netflix when they first recommended the company, your investment would be up more than 21,000%. Learn more about Motley Fool Stock Advisor.
2. Your Investment Strategy
Before you even buy your first share of stock, it’s important to study various investing strategies and choose one or more that you’ll follow.
Investment strategies are important because they take much of the emotion and guesswork out of the equation, giving you strict guidelines to follow when it comes to buying and selling stocks. When investing, it’s important to ensure the stocks you buy meet the criteria set forth by your strategy.
There are three key types of strategies used by most successful investors:
- Value Investing. Value investing is the process of investing in stocks that display a clear undervaluation relative to their peers in hopes of generating outsize gains as the market catches onto the opportunity. This is the strategy that made Warren Buffett millions of dollars.
- Growth Investing. Growth investing is the process of finding stocks that have displayed market-beating growth in revenue, earnings, and price appreciation for a length of time. Growth investors believe that these upward trends will continue to outpace the market, creating an opportunity to generate outsize gains.
- Income Investing. Finally, income investors look for quality stocks that are known for paying significant dividends. These dividends generate passive income that can be used to fund one’s lifestyle or reinvested to increase earnings potential.
Before buying a stock, consider the strategy or strategies you’ve chosen and whether the stock you’re interested in fits in well with that strategy.
Diversification is an important part of building and maintaining a quality investment portfolio. This is the process of spreading your investments across various stocks and other securities across various industries and markets.
Before buying a stock, it’s important to consider the level of diversification that already exists within your portfolio.
For example, you may be thinking about buying shares of Apple or Amazon.com, but when reviewing your current investments, you might realize all you have in your portfolio are tech stocks. What happens if the tech sector crashes?
Well, your portfolio focused solely on tech stocks would tank along with the sector.
However, if you consider buying stocks in another category such as utilities or consumer staples instead of adding more tech stocks, should the bottom fall out of the tech sector, the other holdings in your portfolio will provide stability.
4. Share Price and Intrinsic Value
Famous investor Warren Buffett made his billions by comparing the current market price of stocks to their fair market value. When he finds a company that’s trading lower than the company’s stock price should be, he pounces, taking advantage of the discount. Buffett knows that in the majority of cases, an undervalued stock will eventually climb to reach its fair, or intrinsic, value.
This is a process known as value investing, a type of investing that puts the utmost importance on the valuation of a company and uses various metrics to determine whether the valuation is low, high, or where it should be.
Some of the most important metrics include:
- Price-to-Earnings Ratio (P/E Ratio). The P/E ratio compares the price of a stock to the company’s earnings per share (EPS), essentially putting a price on profitability. For example, if a company trading at $10 per share produces EPS of $1 annually, its P/E ratio is 10, suggesting that the share price is 10 times the company’s earnings on an annual basis.
- Price-to-Sales Ratio (P/S Ratio). The P/S ratio compares the price of the stock to the annual sales, or revenue, generated by the company. For example, if a stock trades at $10 per share and generates $5 per share in annual revenue, its P/S ratio is 2.
- Price-to-Book-Value Ratio (P/B Ratio). Finally, the P/B ratio compares the price of the stock to the net value of assets owned by the company, divided by the number of outstanding shares. For example, if a stock trades at $10, has a net asset value (book value) of $1 billion, and has 100 million outstanding shares, it has a P/B ratio of 1.
Before buying a stock, look into various valuation metrics and how they compare to other stocks within the company’s industry. If you’re following the value investing strategy, you’ll want to make sure the stocks you buy are undervalued compared to their peers.
Even when following any other investing strategy, it’s important to avoid overvalued stocks because the market has a history of correcting overvaluations with declines.
5. Balance Sheet
A company’s balance sheet is an important part of any fundamental analysis effort. It gives you an at-a-glance look at the financial strength and stability of the company.
A company’s balance sheet shows investors the value of assets it owns, the amount of debt it owes, and shareholders’ equity.
When diving into the balance sheet, it’s important to consider the amount of debt the company owes in relation to the assets it owns. After all, as is the case in personal finance, debts can become overwhelmingly burdensome, and in some cases mounting debts can result in bankruptcy.
It’s important to know that the company you’re thinking about buying a piece of comes with a sturdy financial foundation from which to grow.
You’ll also gain valuable information by looking into the company’s cash flow statement. This outlines the cash flowing into and out of the company, showing whether the company has more coming in than it has going out. Of course, you generally want to buy stocks that have more cash coming in than going out, showing further financial strength.
6. The Size of the Company
The size of the company you’re considering investing in plays a major role in the amount of risk you take when you buy it. As a result, it’s important to consider the size of the company in relation to your risk tolerance and time horizon before buying a stock.
The size of publicly traded companies is determined by looking at the company’s market capitalization, or the total market value of the company’s outstanding shares of stock. Here’s how market caps and risk relate to one another:
Penny Stocks and Small-Cap Stocks
Any stock with a total market cap of under $2 billion will fall into the penny stock or small-cap stock category. These companies are relatively young with minimal, if any, profitability. As a result, they represent some of the highest-risk investments.
Mid-cap stocks have a market cap ranging between $2 billion and $10 billion. These companies generally have something going for them. They’ve created a new product, have started generating profits, and in most cases have a promising future ahead. However, they haven’t quite made it big yet.
Mid-cap stocks come with lower risk than penny stocks and small-cap stocks, but there’s still a moderate level of risk, as these companies haven’t attracted the masses quite yet.
Finally, large-cap stocks are stocks representing companies with an overall value of more than $10 billion. These are the companies that have “made it.” In the vast majority of cases, these companies sell popular products and consistently produce significant profits, which are often returned to investors by way of dividends or share buybacks.
As massive companies with huge followings, these companies represent the lowest risk opportunities in the stock market.
Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Stock Rover can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
Volatility describes the rate of fluctuations in the price of a stock or other financial asset. The higher the volatility, the faster the stock will rise and fall, while lower volatility assets will move at a slower, steadier pace.
It’s important to remember that volatility describes the rate of fluctuations in price — it doesn’t determine the direction of those movements.
Stocks that experience high levels of volatility will climb dramatically on good days, and fall like a brick on bad days. As a result, these investments come with significantly more risk than stocks that don’t move quite as fast.
After all, if you have a low-volatility stock that moves more slowly and a recent uptrend begins to reverse, you’ll have plenty of time to cash in on your profits before they disappear.
On the other hand, stocks that experience fast-paced movements don’t give you much time to exit the investment when a trend reverses, which could lead to you giving up all the unrealized profits you may have had — or worse, could lead to losses.
8. Dividend History
Dividend stocks known for giving a portion of their profits to their investors by way of dividend payments. While these payments are secondary to value and growth investors, they are nice to receive, and they’re an absolute must for investors following the income investing strategy.
If your goal is to generate income through your investments, it’s important to take the time to look into the dividend history of the company you’re interested in buying.
Ultimately, income investors are looking for high yields, or a high level of income in relation to the stock’s price. Look for a company’s dividend yield (or annual dividend), expressed as a percentage on your favorite stock research platform.
Beyond the yield itself, it’s important to look into the historic dividends paid by the company. Ultimately, you’re looking for growth in dividend payments on an annual basis for a period of three years or longer. A trend of growing dividend payments tells you a few things about a company:
- It’s Financially Secure. Companies can only pay dividends when they have enough cash in the bank to do so. When a company has a strong history of growing dividends, it shows it is financially secure and not likely to fail any time soon.
- It Hasn’t Stretched Itself Too Thin. Some companies will make large, one-time dividend payments, which can act as bait to drive investors in, but keeping those dividends alive would stretch the company’s finances too thin. Companies that offer compelling and increasing dividends consistently have cash to spare.
- It’s Growing. Finally, companies that remain stagnant won’t have the growth in profits required to afford increasing dividends. Companies that pay dividends with a history of steady increases are likely experiencing growth in profitability equal to or greater than the growth in dividend payments.
9. Revenue and Earnings Growth
To make money with stocks, you’ll need to invest in companies that are growing. The best way to determine if a company is growing is by looking at both its revenue and its earnings.
- Revenue. Revenue is the total amount of money the company generates from its operational activities. For example, when Apple sells an iPhone, the sale price of that phone is added to its revenue total.
- Earnings. Earnings is the amount of money a company makes after all expenses have been paid. For example, when Apple sells an iPhone for $1,200, it might pay $500 for manufacturing, $25 for customer acquisition, and $50 for general corporate expenses associated with the sale. In this example, the cost of the phone to the company is $575, leaving $625 left in earnings for the sale of each phone.
It’s important to look at both revenue and earnings because companies can inflate one or the other figure, but will have a hard time inflating both. For example, a company that wants to generate more revenue might spend much more on advertising. As a result, its revenue will grow, but the advertising costs will cut into profitability, leading to shrinking earnings.
On the other hand, if a company wants to inflate its earnings, it may decide to lay off employees or cut back on marketing. While this may increase the company’s earnings for that particular quarter, its revenue will likely decline. Without employees and marketing driving revenue growth, the earnings increase isn’t sustainable because sales will slow.
10. Preferred or Common Stock
There are two different types of stock that companies issue: common stock and preferred stock. The type of stock you buy will play a role in your earnings potential as well as your ability to recuperate losses in the event of a dissolution of the business. Here’s how it works:
Common stock is the standard type of stock that the vast majority of investors buy. If dividends have been declared, these shares are paid dividends and have a claim to the company’s assets in the event of liquidation.
However, their claim to assets is last. Bond holders and preferred stockholders will be paid prior to a common stockholder, meaning that in the event of a liquidation, there’s a strong chance that common stockholders will experience significant losses.
Preferred stock puts the investor one rung up on the ladder. This type of stock generally comes with predetermined dividends that are consistently paid, and will be paid prior to common stock dividends. Moreover, these investors also have a claim to the company’s assets in the event of a liquidation and will be paid prior to common stockholders.
As a result, preferred stock comes with a lower level of risk and generally higher income earning potential. However, preferred stockholders give up their right to vote on important matters. Moreover, these shares are known for slower growth.
11. Debt-to-Equity Ratio
Debt-to-equity ratio is a tool investors use to determine how thin a company has stretched itself in terms of debt. Of course, high levels of debt are bad because bankruptcy becomes a very real possibility when a company is stretched too thin, just as is the case with consumers.
To determine a company’s debt-to-equity ratio, you simply divide the company’s total debts by its total shareholder equity. For example, if a company has $5 million in debt and total shareholder equity of $10 million, its debt-to-equity ratio is 0.5.
The higher this ratio, the more the company has leveraged debt. As an investor, you’ll want to buy stocks in companies that don’t leverage debt too much, meaning you’ll be best served investing in companies with a low debt-to-equity ratio.
Generally, investors look for a debt-to-equity ratio below 1 for the lowest risk investments. Any debt-to-equity ratio above 2 suggests the company has significant debts and the investment comes with a high level of risk.
One of the biggest mistakes new investors make when it comes to investing is blindly buying stocks simply because they know the name of the company or because someone told them to. Unfortunately, actions like these increase your chances of losses and decrease your potential profitability.
If you’re considering buying a stock, it’s important to educate yourself about that stock, the market itself, and the overall economy before pulling the trigger on the purchase. Research is the foundation of any strong investment decision.
Expecting a new baby brings a lot of excitement. More often than not, the excitement extends deep into your pocket and you may find yourself spending a fortune on things that your baby might never even use. While it is every parent’s joy to give the best to their baby, it doesn’t always have to cost you an arm and a leg. Your baby can still have a great life at a lower cost and by the way, he can’t even tell the difference between a $20,000 handcrafted mattress and the $50 one from the local second-hand store. If you are looking to manage your budget, here are tips on how to save money on baby products and expenses.
Reduce Diaper Expenses
Babies can use between 6-12 diapers in a day. Diapers can vary depending on the number used and the cost per piece which can range from $0.20-0.40. While you can’t forego the use of diapers, these few tips can help you to bring down the amount of money you spend on them.
- Sign up for a subscription program which reduces the cost of each piece by several cents and saves you some bucks in the long run.
- Buy in bulk to save on cost per piece and save on time and gas spent while replenishing the stock every now and then.
- Use cheaper diapers during the day and the pricier, high absorbency ones at night.
- Use cloth diapers during the day and disposable ones at night.
- Ditch the disposables and use reusable nappies.
Bring down the Cost of Feeding your Baby
The cost of feeding a baby can go higher and higher especially if you choose to feed your baby on formula and buy baby food. According to Walmart, breastfeeding can average from $130-$300 while formula can range from $914-$1633. Solid baby food on the other hand can cost between $219 and 951.
If you are planning to save anything on feeding, you may need to consider breastfeeding as much as possible and making your own baby food. Freeze fresh pureed baby food and defrost it in hot water bath when you need it. You can reserve pre-made food for when you need a quick meal or when you are travelling.
Take advantage Second Hand Gear
Babies don’t get to really wear out their stuff. If you let family and friends know that you would be willing to take some gently used hand-me-downs, you will be surprised at the great condition of some of the items and kind of use you can put them to.
You can also visit a second-hand store and buy baby stuff at just a fraction of the original price. Some of the things that you can lay your hands on are prams, toys, baby swings, clothes, dressing tables, shoes, baby-carriers etc. There is no limit to the number of things that you can get. Second-hand toys should be cleaned and air dried to make them sanitary.
Work Around Baby-sitting Expenses
Shuttling a baby to and from day care can be inconveniencing especially for some working parents not to mention the cost that comes with it. Hiring a nanny or a sitter may be a better option but it costs even more, between$10-20/hr. While there are times that this cannot be avoided, there are other times that you can actually work around it. Some of the strategies include;
- Swapping baby-sitting with another parent so that one can run errands while the other is watching the baby.
- Organize with another couple so that each pair can spend some time alone while the other is watching the kids.
- Split baby-sitter cost when you are going out with another couple
Employ Smart Shopping Strategies
Sellers are always looking for strategies to make more sales, shoppers should also look for opportunities to cash in. For example, products that remain after a season are sold at a cheaper price to clear the stock. Some of the strategies that you can adopt to save a few bucks include;
- Shopping for off-season products that you know you will need in future
- Identifying a brand of supplies that you use long-term e.g. diapers and sticking with it to earn loyalty points that you can redeem for supplies
- Sign up for rewards cards offered by the baby retailers you frequent
- Shop at dollar or bargain shops
Saving money on baby products and expenses is possible. However, it calls for you to scrutinize every area of spending and to make the decision to bring it to a minimum. While this could include more than just diapers, baby food, shopping and baby-sitting, any single buck spared should be considered a step in the right direction.
With the 2018 holiday season behind us, many people are now trying to pay off that debt months after the tree has been taken down. Let’s look at how much credit card debt the average person racked up during the holiday season.
Amongst Consumers That Took on Credit Card Debt, Average Amount Was $998
LendEDU asked 1,000 Americans who took on credit card debt from their holiday spending some questions about their level of debt and what it will take to pay it off.
On average, those surveyed increased their credit card debt by $998.36 and are expecting it to take 10.28 months until that debt is paid off. The increased debt load was expected by the majority of those surveyed, with 70.90 percent saying they anticipated their credit card debt was going to go up because of the holidays.
Some of that debt wasn’t put on general credit cards, but rather on store-branded cards. More than half, 52.60 percent, placed some of that debt on a store-branded credit card. This type of credit card generally carries higher interest rates than general credit cards, although, at times, you may have deferred interest offers.
Not Surprisingly, Credit Card Debt-Induced Stress Common After the Holidays
With greater debt usually comes more stress, and 56.80 percent of the survey respondents said their higher debt load was causing them stress. Another 37.60 percent said they weren’t feeling stress from the increased credit card debt, while 5.60 percent said they weren’t sure.
Sometimes after the glow of the holidays has faded, some people regret spending as much as they did. Out of those surveyed, 42.30 percent said they regretted getting into more credit card debt because of their holiday spending. But a higher percent, at 49.80 percent, said they didn’t regret the extra debt, while another 7.90 percent said they weren’t sure if they regretted it or not.
More Than One-Fifth Intend to Restructure or Refinance That Debt
The majority of those who were surveyed, 59 percent, have no plans to refinance their credit card debt by taking advantage of a balance transfer offer, using a personal loan, or employing any other credit product. A much smaller percentage, 21.50 percent, were planning to refinance their credit card debt using one of those methods or another credit product. Another 19.50 percent weren’t sure if they were going to refinance their debt.
If you are still trying to recover from your holiday spending and you have more credit card debt than you’re comfortable with, here are some ways you can whittle away that balance.
- Snag a lower interest rate: You can do this in one of two ways – through a balance transfer to another card, which will result in an introductory APR that may last up to a year, or by calling your existing credit card company. While calling your current credit card company won’t necessarily guarantee a better APR, it may result in a small reduction which could save you a fair amount of money as you pay off the balance.
- Stop using your card: It’s time to stop the bleeding. Avoid using your credit card for any new purchases as you work to pay down that balance.
- Shop around on your other expenses: Now might be a good time to get quotes on switching insurance companies, cable providers, or cell phone and internet carriers. You can use your savings to pay off your credit card balance faster.
Credit card debt can feel overwhelming, but if you’re motivated to pay it off, you’ll succeed in the long run. And in the meantime, be watchful of your spending and consider putting any cash windfalls you receive toward your balance.
Learn some helpful tips on how to pay off those pesky cards quicker.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
While it may be tempting to simply ignore debt collectors, that is generally a poor long-term strategy. Several potential consequences of not paying a collection agency include further impacts to your credit score, continuing interest charges and even lawsuits. Even if you can’t pay the debt in full, it’s often best to work with the collection agency to establish a payment plan.
The stress of having a debt sent to collections can be tremendous, especially with the worries that come from a decreased credit score and a wave of phone calls from debt collectors. You may have considered waiting out the collection agency and hoping the problem goes away on its own.
Unfortunately, collection agencies are unlikely to give up on your debt, especially if you owe a substantial amount of money. Also, you can face continued negative effects from your debt if you try to ignore the debt collector.
However, you can make a plan to deal with debt collectors, often by establishing a payment plan or settling the debt for a lower amount. While this may be difficult at first, it will ultimately help you establish solid credit habits and get you on track toward improving your credit score.
Read on to learn more about four possible consequences of not paying your debt—and at the end of the article, we’ll offer some strategies for dealing with debt collectors.
1. Interest charges
Even after your debt goes to collections, interest charges can continue to accrue. According to the Fair Debt Collection Practices Act (FDCPA), any fees or interest rates outlined in your original contract—like the interest rate of a loan, for instance—can be charged by the collection agency as well.
The collection agency cannot raise your interest rate or add new fees, but it may choose to continue generating interest or charge late fees if they were part of the original agreement. That means ignoring the debt collector doesn’t just fail to make your debt go away—in fact, the amount you owe may continue to grow.
2. Credit effects
Having an account sent to collections will lead to a negative item on your credit report. Unfortunately, the mark is likely to stay on your credit report for up to seven years even if you pay off your debt with the collection agency. It’s also possible that paying off your collection account may not raise your credit score.
Despite all of that, there are several reasons that paying off a collection account could help your credit situation:
- The account will be shown as “paid in full” or “settled.” When future creditors look at your report, a collection account that was paid in full sends a more positive signal than an unpaid debt.
- Updated FICO® models may regard paid collection accounts differently. Changes to the way that FICO® credit scores are calculated may mean that collection accounts paid in full won’t hurt your score.
- Sticking to a payment plan could help establish good credit habits. As you work to pay off your debts, you’ll be establishing positive credit behaviors that will benefit you as you improve your credit history.
While you may not see an immediate boost to your credit score after paying off a collection account, it’s an excellent first step toward creating a more positive credit history for yourself. Over time, the impact of a collection account on your score starts to decrease, which means that your new credit habits—paying on time each month and keeping utilization low, for instance—will start to have a strong effect.
3. Collector communications
Collection agencies will continue to try to reach out to you unless you pay your debt, particularly if you owe a significant amount of money. Collectors are allowed to contact you by phone, mail, fax or email from 8 a.m. to 9 p.m. Additionally, they are allowed to contact your friends and family members to try to locate you—so simply avoiding their phone calls is not a viable strategy.
Also, it’s important to know that collection agencies can continue to reach out to you even after your debt falls off your credit report as long as it is still within the statute of limitations. The statute of limitations, or how long your debt is considered valid, varies based on the type of debt and your state. That said, since the longest statute of limitations can be upwards of 10 years, some collectors could be calling you even after the seven years the collection account is on your credit report.
According to federal law, you do have the right to request in writing that debt collectors stop contacting you. If they don’t stop contacting you, you can file a complaint with the Consumer Financial Protection Bureau.
However, requesting a collection agency to stop contacting you doesn’t mean the debt goes away. If you continue to ignore the debt, the collection agency may file a lawsuit.
If a collection agency is intent on getting paid for your debt, it may decide to initiate a lawsuit against you. After the collection agency files the lawsuit with the state, you’ll receive a copy as well as a summons to appear in court.
You’ll want to consult with an attorney immediately, as failing to appear in court will mean that you lose by default. In that case, the judge could award the collection agency the ability to do any of the following:
- Place a lien on your property, which can be a mark on your public record
- Garnish your wages, which means that your employer may give part of your paycheck to the collection agency before you receive it
- Freeze some or all of the funds in your bank accounts
If you do receive a court summons, work with a qualified lawyer to help build a case, which will hopefully lead to a settlement with the collection agency.
That said, the best approach is to avoid lawsuits in the first place, which means making a plan to deal with debt collectors rather than ignoring them.
Make a plan to deal with debt collectors
Although it can be overwhelming to receive communication from a debt collector, you can formulate a plan to deal with debt collectors to get yourself out of debt. With the right approach, you’ll be able to slowly fix your credit and get back on track.
Use the following approach to begin dealing with the collection agency:
- Set up a payment plan with the debt collector, or see if you can reach an agreement to settle the debt for a smaller amount of money.
- Start practicing good financial habits by keeping your credit utilization low, making payments every month and only spending what you can afford.
- If the debt is not yours or has already been paid, work with an attorney to start a dispute and get the collections mark removed from your credit report.
Over time, you’ll be able to rebuild your credit and pay your debts. If the debt is illegitimate or misreported, however, you should immediately challenge it. To help with that process, consider working with the credit repair consultants at Lexington Law Firm, who can assist with credit repair and potentially get negative items removed from your credit report.
Reviewed by Vince R. Mayr, Supervising Attorney of Bankruptcies at Lexington Law Firm. Written by Lexington Law.
Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.
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“Should I invest or pay off debts first?”
It’s a question that challenges the masses. Unfortunately, the vast majority of consumers don’t learn much about financial literacy in school. Instead, most people must educate themselves before making tough financial decisions.
One of these tough financial decisions is deciding whether or not it’s time to start investing or if it’s better to get out of debt first.
For many, the question is like trying to catch a double-edged sword as it falls to the ground. Making the wrong move can have serious consequences.
Investing vs. Debt Reduction: What’s at Stake?
Making minimum debt payments means paying more in interest and finance charges.
Plus, debt is uncomfortable, especially high-interest credit card debt. When you get your paycheck and you know you have to shell out a decent portion of it to make monthly payments to pay back the money you’ve borrowed, it can be stressful. Many people feel like they may never reach financial freedom.
But taking too long to start investing can have similarly serious consequences. Investing makes retirement possible.
The idea is to take advantage of compounding gains in the market, allowing your money to work for you. That way, you’ll have plenty of money to get you through your golden years.
However, if you wait too long to start investing, gains don’t have time to compound and create a meaningful retirement nest egg.
Investing also helps you maintain a reserve for catastrophic expenses, while focusing all your extra cash on paying off debts leaves you without an emergency fund.
So, what’s the solution?
For most people, it’s a mix of aggressively paying off high-interest debt and making minimum payments on the remaining debts. As you pay off the high-interest debts, you can reallocate the funds to tap into the market, even if you’re not completely debt-free.
After all, wise investments in the market historically generate a larger gain than the interest you’ll pay on lower-cost debts like mortgages, federal student loans, and even some car loans.
How to Decide Whether to Invest or Pay Off Debts First
Everyone strives to make the right financial decisions. In this case, making the right decision means you get out of debt quickly while taking advantage of compounding gains in the market.
When it comes to paying down debt efficiently, it’s critical you develop a detailed understanding of the cost of debt and the gains you could experience through investing.
If debt costs less money than the gains you can realize in the market, it’s better to invest. If investing would make you less money than you would spend on the cost of your debts, paying your debts off is the right way to go.
But how do you acquire an understanding of the overall cost of debt and the amount of money you could be making through investing?
Step 1: Get Intimate With Your Debts
Before you can decide if it’s more advantageous to pay off debts or invest, it’s essential you understand every cost associated with your debts.
When people think about the cost of debt, they often think about interest rates. But some types of debt — credit card debt in particular — also come with annual fees.
It’s also imperative you remember that some creditors charge one interest rate on a percentage of the balance and another interest rate on the rest of the money owed.
Your Debt Spreadsheet
The first step is to build a spreadsheet that lists everything you need to know about your debts. Here’s an example:
|Lender Name||Phone Number||Address||Account Number||Balance||Interest Rate||Annual Fee||Additional Fees|
|Example Debt 1||555-555-1234||123 Main Street||123456||$300||21%||$0||$0|
|Example Debt 2||555-555-1235||1234 Main Street||123457||$1,000||12%||$0||$0|
|Example Debt 3||555-555-1236||1235 Main Street||123458||$12,000||9%||$100||$0|
The sheet is relatively simple. There are six columns of data to fill out for each creditor. Start by filling out the lender name, phone number, and if readily available, the address columns for all of your debts.
Questions for Your Lenders
Once you have these columns filled out, start calling your lenders to fill out the rest. When you call your lenders, there are some questions you need to ask:
What Is My Balance?
You need to know exactly how much money you owe on each account.
What Is the Interest Rate on My Balance?
Make sure you ask this question as written. If you ask, “What is my interest rate?” the representative may tell you your purchase rate without informing you of other interest, such as default rates, cash advance rates, and balance transfer rates.
If they’re charging you more than one rate on any given debt, act as though each interest rate is a new debt in your spreadsheet, filling out a new row for each balance at each.
For example, Joe has a credit card with a balance of $10,000, $5,000 of which accumulated via a balance transfer at a rate of 1.9% annually. The other $5,000 came from purchases at a rate of 19.99% annually.
On his spreadsheet, Joe would have two lines for this debt, one line item for the $5,000 at 1.9%, and one line item for the $5,000 at 19.99%.
Am I Paying an Annual Fee?
Annual fees, while generally small, factor into the overall cost of debt.
Am I Paying Any Other Fees or Finance Charges?
The representative is required to tell you the truth about your debts. As such, asking this question ensures that you cover all the fees associated with your debts.
If there are any additional charges, create an additional column that allows you to track them.
Is It Possible to Reduce My Interest Rate?
Few lenders will openly tell you you qualify for a lower interest rate. However, you can sometimes reduce interest by simply asking. That often depends on who you work with and how your relationship has been through the term of the account.
Step 2: Work to Reduce the Cost of Your Debt
Once you have your spreadsheet filled out, you have a detailed view of the costs associated with your debts.
But before you can decide whether it’s time to invest or aggressively pay off your debts, you must first look for ways to reduce the costs associated with the money you owe.
Banks are constantly looking for ways to bring new customers in. From credit cards to auto loans, personal loans to mortgages, you may be able to save on finance costs by refinancing.
First, think about your credit card debt. If you have a good enough credit score, you can roll high-interest debts into a balance transfer credit card at 0% interest for a period of between 12 and 18 months.
But before transferring any balances, there are three things you need to know about your balance transfer card:
- Balance Transfer Fees. The days of the feeless balance transfer are long in the past. In most cases, balance transfer credit cards come with a fee of between 3% and 5% of the total balance transferred. So before moving forward with a transfer, compare the fees associated with the transaction across multiple offers.
- Standard Interest Rates. Once the promotional periods on balance transfer credit cards are over, they charge the remaining balances at the standard interest rate. So make sure you know what the rate is before transferring a balance.
- Annual Fees. Finally, some balance transfer credit cards come with exorbitant annual fees. In general, avoid balance transfer credit cards with annual fees. However, in some instances, the rewards justify high annual fees.
If you’re having a hard time coming up with your minimum payments, you probably don’t qualify for a balance transfer card. However, that doesn’t mean that you don’t qualify for a reduced rate.
Many credit card companies offer financial hardship programs to help those who are drowning in debt. These programs come with very low interest rates and fixed payment plans, helping you gain control of your debt while freeing up funds for other financial opportunities.
Banks like Chase and Bank of America have reduced rates to 0% for 60 months to help their customers make ends meet. It’s in their best interest to do so. Debts that end in bankruptcy can go unpaid forever.
So if you’re having a rough time paying the bills, start calling your lenders and asking them for help. All you have to do is explain your financial situation and simply be honest.
It’s also important to consider opportunities that can reduce the cost of your auto loan or home loan by searching for refinancing offers online. By refinancing your debts, you can often reduce interest or extend terms, ultimately reducing your overall monthly burden and opening available funds.
If you do take advantage of a balance transfer credit card or refinancing offer, use it to pay off high-interest-rate debts first and update your debt profile spreadsheet once you have.
Pro Tip: With interest rates low, now is a great time to refinance your mortgage. Axos Bank offers great rates and cash back on your mortgage payments.
Step 3: Understand What You Can Expect From Investing
Now that you have a strong understanding of the costs associated with your debts and have taken steps to reduce these costs, it’s time to take a look at what’s available to you in the world of investing.
A vital part of that is understanding how much money you can earn by investing to compare it to the amount of money that you’re losing through your debts.
But what if you know absolutely nothing about the stock market? Is investing even a good idea? The answer is a resounding yes.
First and foremost, learning about the stock market is as simple as reading articles.
Second, there are robo-advisors like Acorns and Betterment that can do all the work for you. But make sure to do your research before you start, as some advisors, whether robo or traditional, generate average returns that are better than others.
The stock market isn’t the only way to invest, either. Lately, there’s been a trend of millennials leaning toward real estate investments, which depending on your financial goals can be an effective option.
According to the National Council of Real Estate Investment Fiduciaries, commercial real estate properties had an average annual return rate of 9.4%, with real estate investment trusts returning an average of 10.5% annually.
No matter how you choose to invest, it’s crucial to invest in what you know. For example, if you know nothing about real estate, buying a property and blindly trying your hand in the market is likely a painful mistake.
Likewise, if you choose to invest in the stock market, investing in a clinical-stage drugmaker is a bad idea if you know little about the process of bringing new medications to market.
By investing in what you know, analyzing your opportunities in the market becomes much more manageable. So if you know cars, invest in car manufacturers and learn through experience before venturing into other options. As you learn how to invest, start learning about other sectors to diversify your portfolio.
Once you’ve figured out which investment options are best for you, do a little research to get an understanding of the average return rates you can expect using the options you’ve selected. Finding average return rates is as simple as asking Google what they are.
Once you know what your average return should be, you can better understand what debts you should pay off before you start to invest.
The S&P 500 is the benchmark stock market index of the United States. It is a list of stocks across various sectors that provides investors with an idea of how the market is doing overall. Investors tend to compare their returns to the S&P returns to gauge how well their investments are doing.
Over the long term, the S&P 500 has historically returned an average of around 10% per year.
According to Business Insider, as of late 2020, the average return of the S&P 500 over the previous 10 years was 13.6%. Of course, it’s important to remember that the market has its ups and downs, and from year to year, returns can vary wildly.
Step 4: Compare & Act
If you’ve made it to this step, you now know how much money your debts are costing you and how much money you can make through investing. Now, it’s time to compare the two.
On your spreadsheet, highlight the debts that cost you more than you would make if you were to invest. These are the debts that need to go quickly.
Now, arrange these debts from highest interest to lowest and send all extra funds to the highest-rate debt first. Continue this process until you’ve paid off these debts. This process is commonly called the debt snowball method.
As you pay off your higher-interest-rate debts, you can make minimum payments on your debts and put the funding you free up into investments. You’re now able to make more money through investing than you lose by having balances.
For example, let’s say you have a mortgage with minimum payments of $900 per month at 4.25% interest, one credit card with a minimum payment of $200 per month at 19.99%, and one credit card with a minimum payment of $125 per month at 17.25%. You also have $1,700 per month to use toward debt and investing activities.
In this case, start by paying the minimum payment on your mortgage and your credit card with 17.25%. These two debts would come with total minimum payments of $1,025 per month.
The remaining $675 per month should all be sent to the 19.99% interest rate credit card, even though they only require $200 per month.
Once you’ve paid off that credit card, continue to make the minimum $900 per month mortgage payments. But you can now send $800 per month to your 17.25%-interest-rate credit card.
Once you’ve paid off that credit card, you can continue making minimum mortgage payments and use the remaining $800 per month to put toward investing activities, as the interest on your mortgage is far lower than the rate of return you can likely expect through investing.
The keys here are making sure to know the average returns on the types of investment vehicles you chose, aggressively paying off any debts with higher interest rates than these average returns, and aggressively investing once you pay off these high-interest-rate debts.
Quarterly Financial Health Follow-Ups
Once you have a plan set and you’re on the path to financial freedom, don’t fall off course. Simply complete this process quarterly to make sure things haven’t changed with regard to your debts.
Also, take some time to review the returns on your investments. If you’re not reaching your goal return, restructure your investments into other investment options that may yield more significant gains.
If you’re not comfortable making investment decisions without a broker, speak to a financial advisor or use a high-quality robo-advisor.
Everyone wants to make it to financial freedom. However, the only way to make it is to be diligent and know what your money is doing for you at all times.
Don’t Forget an Emergency Savings Account
All too often, when beginners start investing, they look at their investment account as if it were a savings account, which is a dangerous concept.
There are several reasons you should work on building an emergency savings account before you start investing, with the most significant being:
- Liquidity. Liquidity refers to how easy or difficult it is to convert your investments into cash if you need access to the money. Pulling your money out of even the most liquid investments, including stocks, could take at least a few days, if not a week or two. Emergencies can’t always wait that long!
- Loss. Making money in the market is a long-term process, during which the values of your investments will rise and fall. If you have an emergency when the market is down, you may have to accept losses in order to cash out.
The bottom line is that investing is a process used to meet long-term financial goals while emergency savings accounts are there as a cushion for the financial needs of today. As such, the most financially stable people save money for both now and later.
Before you start investing, you should have an emergency savings account with enough money to cover at least three months’ worth of expenses.
Pro tip: If you don’t have an emergency fund, set one up today through a high-yield savings account at CIT Bank.
While the question of whether you should pay off your debts or invest first seems like a tough one to answer, the entire process takes less than a couple of hours for most people.
The process is simple. Start by getting an understanding of your debts and your investment options and use this newly procured knowledge to aggressively pay high-interest debts off and invest once you’ve reached that goal.
Just remember to take a look at what’s going on quarterly to be sure everything is going in the right direction.
Also, don’t be afraid to ask for help when it comes to the investing side of the equation. Professional investment advisors do charge fees, but the knowledge they bring to the table has the potential to far outweigh the additional cost through increased returns.
Robots really are coming for your job. At least if you’re an investment advisor.
Over the past decade, a new type of financial advisor has emerged to compete with traditional investment advisory firms. These robo-advisors began as startups backed by venture capital, designed to disrupt the stodgy financial industry.
They succeeded so well that many investment banks have now introduced their own robo-advisors.
But before deciding whether to open an account, make sure you understand robo-advisor pros and cons, and exactly how they work.
What Are Robo-Advisors?
Sometimes called virtual advisors, robo-advisors are automated services that manage your investments for you.
They offer convenient, transparent portfolio management for accounts of all sizes. And they do so at a fraction of the cost of traditional human investment advisors.
When you open an account with a robo-advisor, you fill out a questionnaire to determine your long-term financial goals, risk tolerance, and basic demographics like your age.
Their algorithm then proposes an investment strategy for you, based on best practices for people like you. You can approve it and proceed, or edit your answers to tweak the proposed asset allocation.
As a simple example, say a virtual advisor proposes 40% U.S. stocks, 40% international stocks, 15% bonds, and 5% real estate. Once you approve that asset allocation, then every time you transfer money into the account, it invests your contributions automatically to maintain those ratios.
Most robo-advisors don’t invest in individual stocks. Instead, they invest in passive index funds that mimic major stock market indexes like the S&P 500. That gives you broad exposure to the market with extremely low fund fees (expense ratios).
In short, robo-advisors manage your investments just like a human investment advisor would. Except without the high fees or minimum investment balances.
Examples of Robo-Advisors
You’ve probably heard of many of the robo-advisors available on the market. Although not an exhaustive list, here are a few of the better-known examples of virtual advisors:
For more detail, see our list of the best robo-advisors on the market right now.
Basic Robo-Advisor Features
All robo-advisors share certain core traits.
As you start browsing robo-advisors, keep the following features in mind.
Most robo-advisors keep their fees far lower than human advisory services. Some, such as SoFi Invest and Schwab Intelligent Portfolios, don’t charge an asset management fee at all.
Beyond asset management fees — which are charged as a percentage of the total amount you have invested — robo-advisors also help you save money on fund fees.
Every mutual fund and nearly every exchange-traded fund (ETF) charges a fee called an expense ratio. These can be as low as 0.05% per year for passively managed ETFs — the kind robo-advisors invest in — or as high as 2% or more for actively managed mutual funds.
Robo-advisors keep both types of fees low for you.
Low (or No) Minimum Investment
Robo-advisors have truly democratized the world of asset management and investment advising.
Most human investment advisors require a minimum investment ranging between $50,000 and $250,000 — or more — because they earn their fee as a percentage of assets under management.
By contrast, most robo-advisors require far less to open an account, if anything at all. A few charge a minimum monthly fee, while others don’t bother with that either.
It takes around five minutes to open an account with a typical robo-advisor.
You start with the basics required for all brokerage accounts including name, address, and Social Security number, and usually, you connect your bank account to be able to transfer funds.
Then you fill out their brief questionnaire to set your risk tolerance, investment goals, preferences, and when you want to retire.
The robo-advisor proposes an asset allocation based on your criteria, you approve it or continue tweaking your profile, then you can deposit funds and let the algorithm do the rest.
Better robo-advisors let you set up automated recurring transfers. By automating your savings, you don’t need to rely on willpower to save and invest each month.
It also removes emotions from your investing, which yields far better results. Instead, regular automatic investments allow dollar-cost averaging — a tried and true approach to investing.
I have my robo-advisor set up to transfer a certain amount of money every single week. I never have to lift a finger and never have to think about it — it just happens in the background.
Your asset allocation drifts over time as parts of your portfolio perform better than others.
What started as 40% domestic stocks, 40% international stocks, 15% bonds, and 5% real estate might drift to 35% domestic stocks, 50% international stocks, 5% bonds, and 10% real estate after a few months.
So robo-advisors automatically rebalance your portfolio for you. They sell some of those shares that have performed well and buy more of the shares that haven’t performed as well.
While that might sound counterintuitive, it helps you sell high and buy low, and prevents your portfolio from becoming overweight in one type of asset.
Features of the Best Robo-Advisors
Not all robo-advisors are created equal. Some are free while others charge; some offer dozens of bells and whistles while others keep it simple.
On the higher end of the spectrum, keep an eye out for these premium features.
More Account Options
Most robo-advisors offer a bare minimum of taxable brokerage accounts and IRA account options.
But some take it even further, servicing 529 plans, trusts, 401(k) accounts, and health savings accounts (HSAs). If you need more advanced types of accounts, confirm whether a robo-advisor offers it before opening an account.
Some of the higher-end robo-advisors offer tax-loss harvesting to reduce your tax bill. For example, Betterment suggests its proprietary tax-loss harvesting program can increase total returns by 0.77% annually.
Tax-loss harvesting involves selling “losing” investments to offset capital gains on your winners. It reduces your capital gains tax bill, which helps boost your effective returns.
Socially Conscious Investing
Not all investors have strong feelings about socially conscious investing, but those who do consider it a nonnegotiable.
Some robo-advisors offer the option to only invest in investments considered socially responsible. Like tax-loss harvesting, this is a more premium feature, rarely found among entry-level robo-advisors.
Human Hybrid Advisors
The more personalized financial advice and investment customization you want, the more you’re going to pay.
Think of investment advising as a spectrum. On one end lie the simplest, and usually cheapest, robo-advisors. On the other end of the spectrum lies 100% bespoke human investment advising, where you get as much personal attention and customization as you want.
As you move along that spectrum, you start seeing more of the bells and whistles. And the greatest premium feature of all is a living, breathing human investment expert to work with you one-on-one.
These human hybrid advising models have exploded in popularity over the past few years. In this hybrid approach, you start by going through the same questionnaire, and the algorithm provides you with the same proposed investment portfolio.
But from there, you can hop on a call with a live investment advisor to discuss your portfolio further. Together, you fine-tune your asset allocation to meet your unique needs and goals.
Once set, your account works like a robo-advisor. You automate transfers, and it automatically invests and rebalances according to your asset allocation. When you have investing questions or when you want to adjust your portfolio allocation, you can connect with a human advisor.
Who Should Use Robo-Advisors?
The average middle-class American doesn’t need a human investment advisor, hybrid or traditional. They can simply take advantage of free or low-cost robo-advisors to help them begin building wealth.
However, as you climb the ladder from middle class to wealthy, your needs change. Your portfolio starts getting more complex, your taxes go up dramatically, you have to start worrying about lawsuits and asset protection.
Above a certain net worth — if you have to pin a number on it, let’s say $500,000 — consider upgrading to a human hybrid advisor for more personalized investing advice.
If you have $1,000 to start investing, open an account with a free robo-advisor. If you have $1 million, start looking at either a human hybrid or a traditional human investment advisor.
The Future of Robo-Advisors
The advent of free robo-advisors raises a question: How do these companies actually make money?
Think of free robo-advisors as a loss leader for investment advisory companies. It’s a free service to onboard lower- and middle-income clients to help them start investing.
As those clients start seeing traction and building wealth, they develop as potentially profitable. Advisory firms can then market other services to them, such as human hybrid advising, financial planning services, insurance, mortgages and loans, and for wealthier clients, full human advising.
That’s how I envision the industry evolving. In the 20th century, only the wealthy used these advisory companies. In this century, I expect most Americans to use them, and the companies themselves to make most of their money selling progressively higher tiers of services to middle- and upper-class clients.
With the rise of robo-advisors, working- and middle-class Americans can now get expert help getting started with investing. No account minimums, no high fees, just fast and easy investment management and advisor services.
Which also means no excuses for not investing your savings. Open an investment account, even if you only have a spare $20 as an opening account balance, and start letting your money work for you for a change.
There are two vastly different ways to make money in the stock market. The first is to buy and hold stocks, looking to earn income through dividends and generate growth in capital as valuations grow over time.
The second is to execute short-term trades using technical analysis in an attempt to profit from the volatility, or uptrends and downtrends, seen in stock prices.
Successful short-term traders take advantage of several tools that generate trade signals from data found on price charts. Most tools and technical indicators in the trader’s toolbox offer small bits and pieces of the entire picture.
By combining these tools, price movement can be analyzed to find key support and resistance points, generating buy signals and sell signals.
The Ichimoku Cloud is a unique technical analysis tool, offering up a wide array of data at a glance. Using multiple moving averages and a base line, a cloud on a trading chart is formed, providing information with regard to volatility, trend direction, and potential for gains or losses ahead.
What Is the Ichimoku Cloud?
The Ichimoku Cloud was developed by Japanese journalist Goichi Hosoda, who published his work in the late 1960s. The Ichimoku Cloud combines a series of technical indicators to provide detailed trading information at a glance.
Most importantly, the technical indicator provides information surrounding:
- Support Levels. Support levels are the points at which stocks that are falling are likely to reverse directions and head for the top.
- Resistance Levels. Resistance levels are the points that stocks on an uptrend are likely to hit the top and begin to fall.
- Momentum. Momentum measures the velocity of price movements in the stock market. Stocks trading on high momentum are experiencing high levels of volatility and have the potential for generating large short-term returns. However, with high potential for gains often come high levels of risk.
- Trend Direction. The Ichimoku Cloud also helps the trader to clearly establish trend direction. This is an important technical indicator, as betting against a trend is a risky move.
To provide all of this information, the Ichimoku Cloud plots a series of moving averages on a stock chart, then adds a series of mathematical points, creating a cloud.
At first glance, this trading tool can seem convoluted and difficult to understand, but with a little practice, reading the Ichimoku Cloud can become second nature, and overwhelmingly valuable in your trading strategy.
Pro tip: You can earn a free share of stock (up to $200 value) when you open a new trading account from Robinhood. With Robinhood, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares.
How to Set Up the Ichimoku Cloud
The Ichimoku Cloud uses a series of complex mathematical equations to generate the lines that compose the technical indicator. The good news is that you don’t have to be a mathematician to get your hands on the tool.
While few charting services offer the Ichimoku Cloud, Yahoo Finance makes it available to everyone for free. Simply search for the stock you’re interested in and click the “Full Screen” option in the top right corner of the stock chart.
Once the full-screen view loads, click “Indicators” in the top left of the chart and scroll down to find “Ichimoku Clouds.”
Once you click “Ichimoku Clouds,” the following screen will load:
The default settings from Yahoo Finance are the traditional settings used. However, these can be adjusted to better fit your unique trading strategy.
The settings determine the number of trading sessions in moving averages being plotted on the trading chart, which gives you the ability to fine-tune the tool to your trading time horizon, which we’ll review later.
How to Read the Ichimoku Cloud Indicator
Once you’ve entered your preferred settings and clicked the blue “Save” button, you will be brought to a screen that looks like this:
As you can see, the chart is now painted with a series of color-coded trend lines.
You’ll also notice that the space between two key trend lines is colored in, with some sections being green, and some being red. Each of these lines and shaded areas provide important information.
Although most people refer to the entire indicator as the Ichimoku Cloud, only one piece of the indicator is actually a “cloud.”
The Ichimoku Cloud is the shaded area found between the trend lines for leading span A and leading span B. The overall indicator, including the Ichimoku Cloud and all trend lines plotted on the chart. is known as the Ichimoku Kinko Hyo.
Although this may look too complex to understand, it’s actually quite simple using the following key:
The Conversion Line (Kenkan Sen)
The dark blue line on the chart above is the conversion line.
The conversion line is a plotted trend line that sits between the highs and lows over the past nine trading sessions by default. The number of trading sessions can be changed in the settings by changing the conversion line period.
The conversion line is a key level of support when prices trade above it, and resistance when prices trade below it.
If a stock that has traded below the conversion line breaks above it, it is known as a bullish breakout, and traders see the move as a buy signal.
Should a stock trading above the conversion line break below it, the move is considered a bearish breakout, and declines are expected ahead.
The Base Line (Kijun Sen)
The base line, or the red line on the chart above, trails the conversion line as the slower-moving average in the Ichimoku Cloud. It acts as the center point between the high and low prices of a stock over the past 26 trading sessions by default.
The base line, or trailing moving average, is often used as a trailing stop-loss when short-term traders ride an uptrend toward profits. Should prices fall to this point, positions are sold in fear of a bearish breakout.
Leading Span A (Senkou Span A)
Leading span A is another moving average, showing the trader activity over the past 52 trading sessions.
On the Yahoo Finance chart, leading span A will appear in a bright green color at the top of the shaded-in Ichimoku Cloud during bullish moves and at the bottom during bearish moves.
When leading span A rises above leading span B, an uptrend is confirmed. In this case, the shade between the two lines will be colored green, allowing traders to quickly identify the uptrend at a glance.
Conversely, when leading span A moves below leading span B, a downtrend is confirmed. In this case, the shade between the two lines is colored red, once again allowing for rapid identification of trend direction.
Leading Span B (Senkou Span B)
Leading Span B is the deep red trend line that forms the other edge of the shaded Ichimoku Cloud.
When leading span B is above leading span A, a downtrend is confirmed and the cloud is shaded red.
When leading span B is below leading span A, an uptrend is confirmed and the Ichimoku Cloud is shaded green.
Leading span A and leading span B act as key areas of support and resistance, and create a cloud to help determine the trend direction when looked at in conjunction.
Moreover, crossovers that take place above or below the Ichimoku Cloud can be powerful trading signals. When the conversion line crosses above the base line, and the price action takes place above the Ichimoku Cloud, it’s a strong bullish signal that significant gains are ahead.
On the other side of the coin, when the conversion line crosses below the base line and the price action takes place below the Ichimoku Cloud, the signal is a highly bullish one, suggesting that significant declines are likely ahead.
The Lagging Span (Chikou Span)
The lagging span can be found by looking for the brown line on the Yahoo Finance stock chart.
You’ll notice that the line is cut off 26 periods in the past by default, which can be adjusted by adjusting the lagging span period in the Ichimoku Cloud settings.
This trend line is used to help traders understand the relationship between current trends and previous trends in order to make wiser educated decisions. Many traders believe that when the lagging span crosses current prices, it’s a signal of a trend direction change.
Finally, the Ichimoku Cloud indicator can provide various sell signals. While riding an uptrend to profits, any of the trendlines on the chart are considered areas of support.
So, when a bearish crossover happens, meaning that the price of the stock falls below one of these many trendlines, it could be a sign of a reversal in direction and a signal to sell the stock.
Pro tip: Before you add anything to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Stock Rover can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
Ichimoku Cloud Configurations
The Ichimoku Cloud can be adjusted to meet the needs of the investor or trader that’s using it. The most common configurations are:
Traditional Ichimoku Cloud
The traditional Ichimoku Cloud is the original configuration and has been trusted for decades. It sets the key variables as follows:
- Conversion Line Period: 9
- Base Line Period: 26
- Leading Span B Period: 52
- Leading Span Period: 26
At the time the Ichimoku Cloud was developed, the average employee in Japan worked 46 hours per week in a six-day workweek. So, the default configuration for the Ichimoku Cloud is designed for a six-day workweek.
5-Day Workweek Ichimoku Cloud
The Ichimoku Cloud can be adjusted to be more accurate in terms of data during a five-day workweek using the following settings:
- Conversion Line Period: 8
- Base Line Period: 22
- Leading Span B Period: 44
- Leading Span Period: 22
This is one of the most popular configurations of the Ichimoku Cloud because the largest market in the world — the United States market — operates on a five-day workweek rather than the traditional Japanese six-day workweek.
Trending Markets Ichimoku Clouds
Traders tend to use the following Ichimoku Cloud settings when trading in trending markets with particularly high volatility:
- Conversion Line Period: 9
- Base Line Period: 30
- Leading Span B Period: 60
- Leading Span Period: 30
With the base line, leading span B period, and leading span period being higher values than the traditional configuration, the averages used in plotting the Ichimoku Cloud using this configuration represent more trading sessions, offering a higher level of stability in the data.
After all, long-term predictions have a much higher probability of coming true than short-term predictions.
- Conversion Line Period: 12
- Base Line Period: 24
- Leading Span B Period: 120
- Leading Span Period: 24
With this alternative, all the figures in the configuration have higher values than the traditional setup, ultimately representing far more data.
Although it will not be quite as sensitive to volatility in this configuration, this Ichimoku Cloud setup is another compelling option for those looking for long-term trends.
No Single Technical Indicator Is 100% Accurate
The Ichimoku Cloud indicator has quite a bit going for it. By combining multiple technical indicators into a single trading tool and taking several bits of data into account, it is one of the most accurate indicators out there today.
However, there’s no technical indicator or combination of technical indicators that’s right 100% of the time.
Trading is the act of attempting to predict future price movements in the market. Because nobody can see into the future, the action will lead to losses on some trades.
So, if you want to venture into the world of technical analysis-based trading, there are two guidelines that you should keep in mind:
- Don’t Place All-In Bets. Even the most successful short-term traders make losing trades. The stock market is volatile and highly unpredictable, especially when attempting to make predictions with regard to movement in the value of a stock over a short period of time. So, never make a trade with money you can’t afford to lose. A good way to make sure you don’t take on too much water is to limit the amount of money you risk on any single trade to 5% or less of your overall portfolio value.
- Use Multiple Technical Indicators. The Ichimoku Cloud indicator is a great tool, but it’s best to use other indicators to confirm your findings when you use this or any other technical analysis tool.
The bottom line is that any investment comes with risks. Those risks are exacerbated when predictions are made on a short-term basis.
It’s important to protect yourself from significant losses by limiting your exposure to any single short-term trade and taking advantage of multiple technical indicators that are at your disposal.
The Ichimoku Cloud is one of the most widely used technical analysis tools among successful day traders, and for good reason. There are few indicators that can provide information on momentum, trend direction, support, and resistance with a single glance.
If you plan on taking part in short-term trades, it’s a good idea to familiarize yourself with the Ichimoku Cloud and all of the information that it has to offer.
However, before you risk your first dollar, follow a few stocks that you believe will be good trades with the Ichimoku Cloud layered on the chart. This will give you a better understanding of what price action is likely to take place when the price nears or crosses key trend lines in the Ichimoku Kinko Hyo.
Once you get started, keep the risks in mind and protect yourself by using other technical indicators to verify your finding and limiting exposure should a trade prove to be a loss. Always do your research, always consider your risk, and always protect your investing capital.